What the new tax law means for you
Dec 28, 2017
On December 22, President Trump signed into law a major overhaul of the American tax code.
“After months of speculation, we now have a much clearer picture of the new rules and provisions,” said Vanguard Charitable President Jane Greenfield, “even if the long-term impact of the bill remains uncertain.”
While donor-advised funds are not themselves subject to any new rules or reporting requirements, many Vanguard Charitable donors are likely to find that their charitable giving is affected by the law. The provisions relevant to charitable giving went into effect on January 1, 2018.
“The nature of the new law highlights some of the unique advantages of a donor-advised fund,” said Greenfield. “Charitable individuals can plan to consolidate multiple years’ worth of giving at one time, unlocking the tax benefits of a charitable deduction in the desired year, while maintaining the flexibility moving forward to think strategically about both where they want to give and the timing of their grants.”
Below we offer an overview of the forthcoming changes to provisions relevant to charitable giving. While this will get you started, we recommend, as always, that you consult with a tax advisor for more information on your specific circumstances.
The (near) doubling of the Standard Deduction
| Tax provision | 2017 rule | New tax law |
|---|---|---|
| Standard deduction | In 2017, the standard deduction was $6,350 for single filers and $12,700 for joint filers. | In 2018, the standard deduction approximately doubles to $12,000 for single filers and $24,000 for joint filers. |
A higher standard deduction may make itemizing deductions less desirable in comparison. If you have been an “itemizer” in the past, you will have to decide whether you will continue to itemize in the future. Keep in mind that some popular deductions, such as the state and local tax deduction and the home mortgage deduction, have been limited or eliminated, making it harder to “stack” your itemized deductions so that they surpass the standard deduction. Some may plan to alternate their tax strategy--taking the standard deduction some years and itemizing in others, then grouping their charitable giving in years when they itemize. For individuals taking this approach, a donor-advised fund can be used to ensure constant support for favorite charities, even when the charitable deduction is only taken in certain years. Consult with a tax advisor regarding your specific circumstances.
Changes to federal marginal tax rates
2017 rule:
There were formerly 7 tax brackets, with the highest rate at 39.6%.
| Tax rate | Single | Married filing jointly |
|---|---|---|
| 10% | $0-$9,325 | $0-$18,650 |
| 15% | $9,326-$37,950 | $18,651-$75,900 |
| 25% | $37,951-$91,900 | $75,901-$153,100 |
| 28% | $91,901-$191,650 | $153,101-$233,350 |
| 33% | $191,651-$416,700 | $233,351-$416,700 |
| 35% | $416,701-$418,400 | $416,701-$470,700 |
| 39.6% | $418,401+ | $470,701+ |
New tax law:
Seven brackets have been maintained, although tax rates and thresholds are altered.
| Tax rate | Single | Married filing jointly |
|---|---|---|
| 10% | $0-$9,525 | $0-$19,050 |
| 12% | $9,526-$38,700 | $19,051-$77,400 |
| 22% | $38,701-$82,500 | $77,104-$165,000 |
| 24% | $82,501-$157,500 | $165,001-$315,000 |
| 32% | $157,501-$200,000 | $315,001-$400,000 |
| 35% | $200,001-$500,000 | $400,001-$600,000 |
| 37% | $500,001+ | $600,001+ |
Most taxpayers will see a reduction in their marginal tax rate in 2018. A lower marginal tax rate means a higher after-tax “cost” for charitable giving. For example, an individual with a marginal tax rate of 39.6% under the 2017 law could make a $100 charitable contribution for an after-tax cost of $60.40 ($100-$39.60=$60.40). If this individual’s marginal tax rate decreases to 35% in 2018, their after-tax cost for the same gift would increase to $65 ($100-$35=$65). (This scenario assumes the individual is planning to itemize in both years, as the charitable contribution deduction can only be claimed when itemizing.)
AGI limitation boost
| Tax provision | 2017 rule | New tax law |
|---|---|---|
| AGI limitation | Taxpayers were able to deduct 100% of eligible charitable contributions of cash provided that the deduction total did not exceed 50% of their adjusted gross income (AGI). (This limitation is lower for contributions of appreciated securities, and for contributions given to certain types of charities, such as private foundations.)
Any contributions exceeding this limit could be carried forward and applied over a period of five years. | This ceiling has been increased for contributions of cash. Charitable deductions may be applied up to 60% of AGI. (Taxpayers will continue to be able to deduct 100% of eligible contributions of appreciated securities provided that the total deduction does not exceed 30% of AGI.)
The carry forward provision remains the same. |
While changes to the standard deduction and marginal tax rate have tended to make the 2018 law less favorable for charitable giving, there are some advantages to giving under the new law. The increase in the AGI limitation for cash and cash-equivalent contributions means that charitable individuals who itemize their deductions can give more cash to charity before reaching their annual limitation, which will be 60% of AGI under the 2018 law. In both the expired law and the new law, charitable deductions that exceed the relevant AGI limitation can be carried forward and used over the next five years. This may offer relief for taxpayers who intend to group their giving into certain years, but are worried about exceeding their limit.
Example: An individual with an adjusted gross income (AGI) of $100,000 could take up to $50,000 in charitable deductions for contributions made in cash under the expired law. In 2018, with the same AGI, the individual could take up to $60,000 in charitable deductions. Remember: A stricter limitation comes into play for contributions of appreciated securities.
Long-term capital gains rates unchanged
2017 rule:
The 2017 long-term capital gains tax rates are displayed below. (High-income individuals were subject to an additional 3.8% NIIT.*)
| Income level: Single | Income level: Married filing jointly | Long-term capital gains tax rate |
|---|---|---|
| $0-$37,950 | $0-$75,900 | 0% |
| $37,951-$418,400 | $75,901-$470,700 | 15% |
| $418,401+ | $470,701+ | 20% |
New tax law:
Long-term capital gains tax rates remain the same in the new tax law, with thresholds still corresponding to those established in the expiring tax law. Differences between 2017 and 2018 rates are due to inflation. The NIIT remains in place.
| Income level: Single | Income level: Married filing jointly | Long-term capital gains tax rate |
|---|---|---|
| $0-$38,600 | $0-$77,200 | 0% |
| $38,601-$425,800 | $77,201-$479,000 | 15% |
| $425,801+ | $479,001+ | 20% |
*Certain high-income taxpayers also pay a 3.8% net investment income tax (NIIT), which includes capital gains and qualified dividend income, as well the interest and other dividends included in ordinary income. The maximum marginal rate on capital gains and qualified dividends then becomes 23.8%.
Donations of appreciated securities will remain an incredibly tax efficient way to give in 2018 and beyond.
Pease limitation repealed
| Tax provision | 2017 rule | New tax law |
|---|---|---|
| Pease limitation | In 2017, certain itemized deductions were reduced when adjusted gross income (AGI) exceeds $261,500 for single filers and $313,800 for married couples filing jointly. The Pease limitation, as it was known, essentially acted as a 3% surtax on high-income taxpayers who itemized their deductions. | The Pease limitation is repealed in the new law, lifting the limit on itemized deductions for high-income taxpayers. In other words, the reduction imposed by the Pease limitation will no longer apply. |
For high-income taxpayers who itemize deductions, the absence of the Pease limitation may provide an additional small incentive (or remove a small disincentive) for making additional contributions to charity in 2018 and beyond.
Estate tax weakened
| Tax provision | 2017 rule | New tax law |
|---|---|---|
| Estate tax | In 2017, heirs were subject to an estate tax with gross assets exceeding $5.49 million for single filers and $10.98 million for married couples, in addition to the “step-up” basis rule.** Charitable bequests can reduce the gross estate dollar-for-dollar without limits, potentially decreasing the estate tax burden for heirs. | The estate tax exemption was approximately doubled to $11 million for single filers and $22 million for joint filers. The step-up basis rule was maintained. |
**Step-up in basis rules apply to property you inherit. The person inheriting the property holds the property with a fair market value basis, rather than the lower basis (generally the original purchase cost) the property had in the hands of the testator.
Individuals and families have an incentive to donate to charity any assets that may be subject to an estate tax. With the new law, this incentive will be weakened, as the estate tax will apply to fewer individuals and families in the U.S.
What about QCDs?
Along with questions about the new tax law and its implications, donors have also asked about potential changes to rules governing required minimum distributions (RMDs) from individual retirement accounts. One tax provision that remains unchanged, however, is the prohibition on donor-advised funds receiving these distributions in the form of qualified charitable distributions (QCDs). Individuals who are subject to RMDs can opt to distribute up to $100,000 tax-free directly to a qualified public charity, but donor-advised funds, supporting organizations, and private foundations are excluded from this provision (and have always been). Vanguard Charitable offers its donors the Sustainable Disaster-Relief Fund (SDRF), a field-of-interest fund that supports communities recovering from natural disasters, as a potential destination for QCDs. Because the SDRF is not a donor-advised fund, you will have no discretion over grants from this fund. (Consult our primer on RMDs and QCDs to learn more.)
Charities prepare for uncertain times ahead
Many members of the charitable community believe that, on the whole, the new law will disincentivize charitable giving in the years to come. They worry that new provisions—especially the doubling of the standard deduction—will edge out small donors and lead to a substantial reduction in charitable contributions.
As taxpayers and charities adjust to the new tax law, strategic donors should stay focused on the many benefits of charitable giving. “Tax advantages are only one of the reasons that we give to charity,” said Ann Gill, Vanguard Charitable’s chief philanthropic officer. “Nonprofit organizations help to protect the well-being of our society, and many of the vital programs and services they offer would likely not exist otherwise. By committing to continue supporting these organizations in the future, donors can help support their worthy causes, along with our country’s tradition of philanthropy.”